For small businesses in the 10 states with retirement legislation, now is the time to understand the program and prepare for it.
There is a retirement savings crisis in America.
According to a recent Go Banking Rates survey, 58 percent of Americans have less than $1,000 in their savings account, and the National Institute on Retirement Security (NIRS) found that 57 percent of working-age households have no retirement assets. And of those that do, only half are adequately prepared for a comfortable retirement.
The AARP found that people are more likely to save if their employer offers a 401(k) or some type of retirement savings program. While most large businesses do offer 401(k) programs already, small businesses are less likely to participate, often due to cost.
To reduce barriers to entry, many states are creating free or low-cost savings programs for small businesses to offer their employees.
Here's what you need to know for 2020.
|Which states are rolling out plans?
Currently, 28 states are working on creating state-sponsored retirement programs. These programs are in different stages of development, but 10 states: California, Connecticut, Illinois, Maryland, Massachusetts, New Jersey, New York, Oregon, Vermont, and Washington, have passed legislation.
Note: Some states are making enrolling optional, not mandatory. In other words, you have to enroll in a plan, not their plan.
Most plans are free for employers but have high fees for employees
Even though the aim of these programs was to increase access to affordable retirement savings opportunities, a lot of these plans end up being expensive when you consider fee structures.
|Most plans are ROTH IRAs not 401(k)s
A lot of people refer to the plans as 401(k)s but this isn't necessarily true. Most are actually Roth IRAs, which have a different set of things to contrast from a competitor offering another 401(k):
- 401(k)s are pre-tax vs. Roth IRAs are post-tax
- 401(k)s have a higher annual contribution limit vs. Roth IRAs
Here's a quick breakdown of the models some states are deploying:
| Type of plan | States using this model | Compared to a 401(k) |
| Roth IRA | CA, IL, NY, OR | Lower annual contribution limit, contribution restrictions based on income. |
| Multiple Employer Plan (MEP) | MA | Less control over plan design, higher potential for abuse. |
| Marketplace | WA | Doesn't directly offer retirement plans or list your options (or their pros and cons). |
They may offer your organization a one-size-fits-all solution
Limited flexibility in the plans and investment options gives organizations less control over the details of their retirement savings plans.
|What does this mean for small businesses?
For small businesses in the 10 states with retirement legislation, now is the time to understand the program and prepare for it. While using the state-sponsored plans is not mandatory, businesses do have to offer some kind of 401(k) retirement plan. Many of the start dates are still in the
|Where can I learn more about these plans?
State-specific resources
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